DBRS Downgrades Mulvihill Premium Canadian Bank Preferred Shares to Pfd-3 (high)

DBRS has today downgraded the Preferred Shares issued by Mulvihill Premium Canadian Bank (the Company) to Pfd-3 (high) from Pfd-2 with a Stable trend. The rating had been placed Under Review with Developing Implications on March 19, 2008.

Offering proceeds were primarily invested in a portfolio of common shares (the Portfolio) issued by Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada and The Toronto-Dominion Bank (the Banks). The Portfolio is actively managed by Mulvihill Capital Management (the Manager), and the Portfolio weighting of each of the Banks can vary. The Manager writes covered call and cash-covered put options to generate additional income to supplement the distributions made on the Preferred Shares and the Class A Shares.

Holders of the Preferred Shares receive fixed cumulative quarterly dividends yielding 5.75% per annum on the par value. The Company aims to provide holders of the Class A Shares with quarterly distributions of $0.20 per share, as well as the opportunity to receive special distributions based on performance of the Company. These distributions have the potential to grind down the net asset value (NAV) of the Portfolio over time.

Although the credit quality of the Banks is strong, the NAV of the Portfolio has experienced downward pressure due to its concentration in the financial industry. In the last year, the NAV has dropped from $27.41 per share to $21.47, and the current downside protection available to the Preferred Shareholders is approximately 30%.

The rating is based on the following:

(1) Downside protection available to the Preferred Shares (30% as of April 17, 2008).

(2) Consistency of dividend distributions of the Banks.

(3) Strong credit quality of the Banks

The main challenges to the rating are the following:

(1) Class A Shares dividends are at the Manager’s discretion.

(2) The volatility of price and changes in the dividend policies of the Banks and potential erosion of the Portfolio under challenging market conditions may result in significant reductions in downside protection from time to time.

(3) The Portfolio is entirely concentrated in the Canadian banking industry.

(4) There is a reliance on the Manager to generate income from option writing.

The redemption date for both classes of shares issued is November 1, 2010.

Note:
All figures are in Canadian dollars unless otherwise noted.